As Republican leadership in the House bobs and weaves to get their tax plan through the Ways and Means Committee to the floor of the House of Representatives, Senate Republicans are about to unveil their own tax plan. There will be major differences.

The master Republican strategy calls for the House to pass their bill by Thanksgiving and to present a final bill (after reconciliation with the Senate) to President Trump before the end of the year.

The fact that Congress has not passed a major tax bill since 1986 should give pause to anyone who thinks the legislative struggle to accomplish this feat is no greater than the effort required to name a post office building. Although Republicans hold the majority in the House and Senate, the party cannot afford to have their caucuses splinter over issues that do not breakdown along ideological and party lines. Otherwise, Democratic votes will be needed for passage.

And, one of these potential splinter issues is the treatment of state and local tax preferences in the federal tax code.

The proposal in the House Ways and Means Committee would eliminate state and local income and sales tax deductions. The state and local property tax deduction would be capped at $10,000. These state and local tax (SALT) deductions have been embedded in federal tax policy for over 100 years! If approved, the Hobson’s Choice for state and local governments is a choice between double taxing their citizens or cutting essential services.

If SALT were repealed, almost 30.0 percent of all federal taxpayers across the country would be adversely affected. According to a report prepared by the Government Finance Officers Association, some 37.0 percent of Virginia tax filers use SALT deductions with the average deduction totaling over $11,000. In fact, the percentage of Virginians relying on SALT exceeds the national average of 30.0 percent in eight of Virginia’s 11 congressional districts. The percentages range from 31.0 percent to as high as 49.0 percent in those eight congressional districts.

Another of the plan’s provisions goes after the interest deduction available on mortgage debt, lowering the cap on new mortgages from $1.0 million to $500,000. Homebuilders are upset, protesting that the change provides less incentive to build and less incentive to buy. The provision essentially squeezes the high end of the housing market, where the biggest profits are made. Less than 3.0 percent of all U.S. home mortgages are more than $500,000, according to CoreLogic, a financial and information analysis company. However, there are communities in Virginia where the proposed change could have a significant impact on real estate taxes. For example, in Arlington County the median sales price of a home is roughly $500,000.

A third provision of the tax plan targets infrastructure financing by eliminating preferential tax treatment for future private activity bonds. The proposal bars the sale of municipal bonds for professional sports stadiums and privately-run infrastructure projects such as toll roads and airports. In Virginia, the two-lane tolled tunnel project between Norfolk and Portsmouth depends on these securities for financing according to Bloomberg News.

States like Virginia often use some of their private activity bond allotment to lower borrowing costs for developers of low-income housing and to boost manufacturing and industrial activities. Local housing authorities receive a portion of the state allocation. Ending the program would make it harder to build affordable multifamily housing and, on the single-family side, it could hurt first-time home buyers, according to Moody’s Investors Service.

The proposal also eliminates advanced refunding of debt issues. During the Great Recession and the recovery period afterwards, state and local governments took advantage of record sinking interest rates to refinance municipal debt before the 10-year mark when such bonds typically become eligible for refinancing. The savings to local taxpayers were significant. One such example is Arlington County. The county refinanced $100.0 million dollars through the Virginia Resources Authority in 2014 to save $147,000 annually.

If Congress approves these changes to municipal finance, will the next assault target federal tax-exemptions on local general obligation and revenue bonds?

The tax plan would also end deductions for businesses offering parking or transit benefits to employees. This could discourage businesses from offering commuter benefits and negatively affect local ridership and revenue. However, employees would still be able to receive under the plan untaxed transportation benefits or have them deducted as pretax income from their paychecks.

Also, in a blow to urban redevelopment efforts, the tax plan would eliminate the federal Historic Tax Credit Program. These credits encourage the redevelopment of historic and abandoned buildings. The National Trust for Historic Preservation reports that the credits have been used to renovate more than 40,000 structures and stimulate $117.0 billion in private investment since enactment in 1981. According to advocates, for each $1.00 credit provided about a $1.20 is returned to the U.S. Treasury. For every $1.00 the federal government provides, the private sector invests $4.00 of its own money.

A study done by the National Park Service and Rutgers University reviewed the tax credits’ economic impact. For Virginia, the study noted $434.9 million in total rehabilitation spending. The tax impacts were $11.3 million in local revenues, $14.6 million in state collections, and $74.5 million in federal taxes.

In the City of Staunton from 2001 to 2016, more than 50 properties have been renovated through Historic Tax Credits, resulting in private investments of over $72.0 million.

The Historic Tax Credit Program is usually combined with the state’s own Historic Rehabilitation Tax Credit Program. A study done by the VCU Center for Urban and Regional Development reported that from 2000 through 2011, an average of 174 projects have been certified each year in Virginia. From 1997 through 2013, investors pumped almost $3.0 billion in over 2,300 historic rehabilitation projects in the Commonwealth.

Conclusion:

The congressional debate on tax changes will affect the bottom line of Virginia’s localities’ balance sheets. At stake are fewer dollars to deliver the services that citizens need, leaving local elected officials with unattractive choices to either raise local taxes or to cut programs and services.

The proposed tax changes under discussion will be subject to intense political pressure because federal tax policies affect everyone – state and local governments, individuals and families, and small businesses and corporations.

To protect the vital interests of your citizens, it is time for VML members to weigh in on the issues now before Congress. VML urges members to let their Representatives and Senators know what is at stake.

Economy plods ahead at a slow and steady pace

The U.S. Labor Department reported last week that the economy added 261,000 jobs in October. Wall Street economists surveyed by Bloomberg had expected an increase of 325,000, anticipating a big bounce back from September’s hurricanes. Although the new job burst was less than predicted, the October figures marked the 85th consecutive month the economy added jobs.

The unemployment rate continued to drop, hitting the lowest recording (4.1 percent) since December 2000.

The positive job numbers and the low unemployment rate mask to some degree two other important measures. The first measure is wage growth. Although wages have been rising faster than inflation, the rate is slow compared with historical standards. The Employment Cost Index, however, considers benefits as well as cash pay. Using this measuring model, total compensation was up 2.5 percent in the third quarter compared to a year earlier. This is the fastest pace in 2 ½ years.

The second measure is labor force participation. Although the unemployment rate sunk to 4.1 percent in October, the labor force fell by 765,000 workers. The Labor Department reported the national labor participation rate at 63.1 percent. Ten years ago the rate stood at 66.0 percent. The share of adults who are either working or actively looking for work is near multi-decade lows, raising doubts about the economy’s ability to continue to grow as the Baby Boomer generation leaves the workplace. Some economists contend the economy is now at full employment.

In Virginia, the economic measures include some good news and some bad news. The good news is that September’s unemployment rate declined 0.1 percentage point to 3.7 percent. The bad news is that payroll employment also declined with a net job loss of 6,900 jobs. On a year-over-year basis, total employment in the Commonwealth rose 1.1 percent, which trails slightly the national average of 1.2 percent.

There’s good news in that real personal income during the second quarter of 2017 increased 1.5 percent compared to the same period a year earlier.

Concerning the housing market the news is mixed. According to CoreLogic Information Solutions, Virginia home values were virtually unchanged in August, but appreciated 3.0 percent since August 2016. The homeownership rate in Virginia registered at 68.4 percent in the second quarter of 2017. This is 4.5 percentage points above the U.S. rate. But, Virginia’s homeownership rate is 6.1 percentage points lower in the third quarter of 2017 than in the third quarter of 2000. The state is currently ranked 22nd highest homeownership rate among the states.

But, perhaps the most important news regarding the state’s economic recovery from the Great Recession is its unevenness. According to an article in the Washington Post, the state’s urban areas have mostly recovered all the jobs lost in the recession. The change in jobs since 2007 across the state’s regions is startling.

Uneven Job Growth Marks State Recovery From 2007-2016

Area

Percent Change

Northern Virginia

6.6

United States

4.8

Central Virginia

4.1

Virginia

3.2

Shenandoah

.004

Hampton Roads

(1.4)

Southside

(2.6)

Southwest

(4.7)

The bottom line is that most areas of the state had fewer jobs in 2016 than in 2007. Of the 133 counties and cities, 85 have lost jobs since 2007. And, just three counties, Loudoun, Prince William and Arlington, accounted for 60.0 percent of all the new jobs created since 2007. That’s more than 70,000 jobs.

The uneven recovery in jobs and the slow growth in housing will seriously challenge state and local budget development in the next year.

Financial realignment plan of mental health hospitals to be unveiled

Virginia’s behavioral health system is paying about the same amount to operate its state hospitals as it pays to community services boards (CSBs)/behavioral health authorities (BHAs) to serve people in their communities. The key difference is that hospitals serve about two percent of individuals involved in the behavioral health system versus the 98 percent of individuals served through community services boards. This is not the case in several other states, where community-based service systems are better funded and better able to serve more people without resorting to hospital admissions.

The 2017 General Assembly requested that the Department of Behavioral Health and Developmental Services (DBHDS) create a timeline and funding mechanism for financial realignment of the hospitals/community system to eliminate the “barriers” that keep people in hospitals longer than is necessary; appropriations that can be made to CSBs to expand community mental health and substance abuse program capacity; maximize use of community resources to divert hospital admissions and assist in timely hospital patient discharges; create financial incentives for CSBs to serve people in the community; find sources for bridge funding to ensure continuity of care in transitions to the community, and address one-time, non-recurring expenses associated with reinvestment projects. The report is due Dec. 1.

A major issue being addressed in financial realignment is payment for the use of state hospitals. State funds pay for the hospitals; there are no limits on admissions from CSBs/BHAs or jails, and no incentives exist for diverting patients from admissions. Hospital admissions have been increasing and overall hospital census have increased; the issue has been exacerbated by legislation in the last few years that made state hospitals the “last resort” placement for any emergency placements in which private/local hospital beds cannot be found.

The proposed plan to be implemented over four years would focus on community integration; building alternatives to state hospital placement. Part of the plan includes moving forward with legislation passed in 2017 that would increase the required array of community-based services over the next four years (services outlined in the STEP-VA plan). While the legislation outlined the services to be provided, the funding for those services remains an open question. Funds allocated by the 2017 General Assembly for the first tier of services only served 18 of 40 CSBs.

The plan in the out-years would also establish bed utilization targets for CSBs/BHAs. Under this plan, CSBs using beds above their monthly target would be billed for such use; while usage below the monthly target would result in a “refund” from the hospital. The performance contract would preclude local funds from being used for state hospital bed purchase.

This plan will be presented and discussed at the House Appropriations Retreat on Nov. 14 in Portsmouth; it will likely be discussed as well at the meeting of the Joint Subcommittee to Study Mental Health Services in the 21st Century in late November.

No agreement reached on electronic meetings

Amendments to the current statute regarding electronic communications will be considered Nov. 20 at the meeting in the Capitol of the Virginia Freedom of Information Advisory Council. The council’s Electronic Meetings Subcommittee failed to reach a consensus at its Nov. 1 meeting on what form the amendments should take, so the Council will have before it two drafts: one from the Council and one from the Tobacco Commission.

The subcommittee also discussed the definition of “electronic communications.” The current definition in Virginia Code Section §2.2-3701 includes only “any audio or combined audio and visual communication method.” The definition does not include electronic mail or text messages; in addition, the definition does not explain electronic – for example, does electronic include speaking into a microphone or is it more than that? The Council subcommittee directed staff to draft a new definition with more specificity. A chart entitled “distinctions made in FOIA concerning public meetings and electronic communications” was also provided.

Local Government Policy Council meeting

Governor Terry McAuliffe welcomed local government officials representing VML, VACo, and First Cities to a final meeting of his Local Government Policy Council on Oct. 31 in Richmond. Following a summary of his Administration’s initiatives and accomplishments to date, members of McAuliffe’s cabinet, including Secretary of Finance Ric Brown, Secretary of Transportation Aubrey Layne, and Secretary of Public Safety and Homeland Security Brian Moran, provided detailed updates on issues currently being addressed by their agencies and secretariats. These updates generated questions and discussion on broadband, weapons and public gatherings, and teacher shortages.

McAuliffe created a local government policy council upon his election four years ago, and has maintained meetings of the council each year as a way to share information and allow for discussion of issues of particular importance to localities.

Affordable housing draft report reviewed

There is a significant shortage of affordable housing in Virginia, according to a draft report considered by the Virginia Housing Policy Advisory Council at its Oct. 30 meeting. The draft report, entitled “Addressing the Impact of Housing for Virginia’s Economy,” is to be released in November at the Virginia Governor’s Housing Conference.

Other key findings include:

Substantial levels of new affordable housing production are needed in order to accommodate anticipated workforce growth.

Feds set up drone pilot project

The pilot program is open to states, local governments and tribal governments, and is expected to provide immediate opportunities for new and expanded commercial UAS operations, foster a meaningful dialogue on the balance between local and national interests related to drones, and provide information to the U.S. Department of Transportation on expanded and universal integration of such aircraft into the National Airspace System.

Secretary Chao has until Jan. 23, 2018 to establish the program. To be eligible for selection, an applicant must be prepared to begin integration of UAS operations within its jurisdictions within 90 days after the partnership has been established. Selection criteria include the overall diversity of proposed UAS operations to be conducted; the overall diversity of proposed modes of governmental involvement; community involvement; commercial objectives that serve the public interest; overall economic, geographic and climatic diversity of the selected jurisdictions; and the ability of the applicant to meet one or more of eight policy objectives. The pilot program ends within three years unless the Secretary extends it.

The National League of Cities issued a statement following the announcement of the pilot program welcoming the President’s action. “Through this pilot program, we hope to explore the best ways to integrate new technology into the airspace above our communities in partnership with the federal government and the private sector – with the flexibility necessary for communities to meet our residents’ needs.”

Crime commission considers marijuana decriminalization

The Virginia State Crime Commission will be considering three policy options relating to marijuana decriminalization at its upcoming Dec. 4 meeting in Richmond. The options, as outlined in a staff report made at the Oct. 30 meeting of the commission, are:

Maintain the status quo-possession of marijuana would remain a criminal offense with no changes to the law;

Remove the jail sentence as punishment for possession of marijuana;

Decriminalize possession of small amounts of personal use marijuana.

VML communicated its position on marijuana decriminalization to the commission members. The position, adopted at the Oct. 3 business meeting in Williamsburg, supports a change to the Code of Virginia to make anyone found to be in the simple possession of no more than 0.5 ounces of marijuana for personal use subject to a civil rather than criminal penalty.

Amy Atkinson, executive director of the Commonwealth of Virginia Commission on Youth (VCOY), presented draft recommendations for reporting of Child Protective Services cases to Virginia’s public schools to the Commission at the Nov. 8 meeting. Atkinson presented four recommendations and stated these recommendations were based on input from the Virginia Department of Education and the Virginia Department of Social Services. The draft recommendations can be found here: Draft Recommendations for reporting of Child Protective Services Cases to Virginia’s Public Schools.

Senator Favola, chair of the VCOY, requested that the recommendations be sent out for public comment, before any further consideration by the Commission.

Comments may be submitted by email at aatkinson@vcoy.virginia.gov, hand-delivery or mail to the Commission on Youth, 900 E. Main St, Floor 11, Richmond, VA 23219 or by fax to 804-371-0574. The Virginia Commission on Youth will be accepting public comment on the 2017 Draft Recommendations which must be received by 5:00 p.m. Friday, Dec. 1.

Public comments received by the deadline will be provided to the Commission for consideration at the Dec. 5 meeting.

Transportation topic of December Leadership Academy webinar

Lisa Guthrie, executive director of the Virginia Transit Association, is the featured speaker at the last Leadership Academy event of 2017. Learn about transportation and related 2018 legislative and financial issues that could affect localities and the Commonwealth in this free one-hour webinar. Register online.

Census Bureau seeks helps, offers training on address review

The U.S. Census Bureau requests local government help ensuring an accurate address list for the 2020 Census. Called the Local Update of Census Addresses (LUCA) Program, this effort updates the bureau’s list with every living quarter and associated population for inclusion in the census.

Dec. 15, 2017 is the deadline to register to participate in the LUCA Program. Training workshops on the process are underway now:

Last call for ornaments for Executive Mansion

The deadline to send an ornament celebrating the heritage of your city, town, or county for the Executive Mansion has been extended. The new deadline is Nov. 20 at VML. Thousands of visitors tour the mansion to view its holiday decorations and will view your handmade ornament. Learn how to participate in this fun holiday activity.

If I Were Mayor contest entries due Dec. 22

Seventh grade students are invited to participate in VML’s annual essay contest answering the topic “if I were mayor…”. Entries are due Friday, Dec. 22 at VML. Share this opportunity for cash prizes and honors with schools and youth in your area. See entry form and rules.